U.S. EPA’s Proposed Greenhouse Gas Standards for the Utility Industry – How Powerful Are They?

A major event in the Climate Change arena occurred on March 27, 2012 when, for the first time, U.S. EPA proposed Standards of Performance for New Stationary Sources (NSPS) for emissions of carbon dioxide (CO2).  The proposed standards were specific to new affected fossil fuel-fired electric utility generating units (EGUs) and were the direct result of two (2) settlement agreements proposed concurrently by U.S. EPA on December 30, 2010.  The settlement agreements were proposed in order to resolve threatened litigation filed by numerous states concerning February 2006 amendments to 40 CFR Part 60, Subpart Da (Standards of Performance for Electric Utility Steam Generating Units, Industrial-Commercial-Institutional Steam Generating Units, and Small Industrial-Commercial-Institutional Steam Generating Units) and the June 2008 final rule entitled “Standards of Performance for Petroleum Refineries.”  U.S. EPA retained the definition of EGUs previously established under Subpart Da that differentiates between EGUs (sources used primarily for generating electricity for sale to the grid) and non-EGUs (sources primarily used to generate steam and/or electricity for on-site use). In their originally filed petitions, the states made the claim that neither of the cited rules established standards of performance for GHG emissions, and further pointed out that U.S. EPA had a statutory obligation to issue NSPS for all pollutants it regulates.

Under the terms of the consent decree, U.S. EPA had committed to proposing standards of performance for GHG for new and modified EGUs subject to Subpart Da by July 26, 2011, with final action no later than May 26, 2012, and also committed to proposing standards of performance for GHG for new and modified petroleum refineries subject to Subparts J and Ja (Petroleum Refineries, and Petroleum Refineries for Which Construction, Reconstruction, or Modification Commenced After May 14, 2007, respectively), Subpart Db (Industrial-Commercial-Institutional Steam Generating Units), Subpart Dc (Small Industrial-Commercial-Institutional Steam Generating Units), Subpart GGG (Equipment Leaks of VOC in Petroleum Refineries for Which Construction, Reconstruction, or Modification Commenced After November 7, 2006), and Subpart QQQ (VOC Emissions from Petroleum Refinery Wastewater Systems) by December 10, 2011, with final action no later than November 10, 2012.

To date, U.S. EPA has limited its focus and fulfillment of the December 2010 settlement agreements for fossil fuel-fired EGUs and natural gas-fired stationary combustion turbines.  In this article, we’ll provide an overview of each of the specific CO2 standards that have been proposed for the utility industry thus far and some of the concerns that have been voiced by industry, political groups, and environmentalists alike.

Proposed Standards for New Sources

U.S. EPA’s first proposal, which was proposed on March 27, 2012 and published in the Federal Register on April 13, 2012, specifically applied to new affected fossil fuel-fired EGUs.  As presented in U.S. EPA’s Regulatory Impact Analysis for the April 13, 2012 proposed rule, energy industry modeling forecasts uniformly predicted that few, if any, new coal-fired power plants would be built in the near future, due to the increased availability of, and lower cost for, natural gas as compared to other types of fossil fuel.  Therefore, U.S. EPA proposed its April 13, 2012 proposed standard specifically based upon the demonstrated performance of natural gas combined cycle (NGCC) units.  Since NGCC units were already very prevalent throughout this country and anticipated to be the predominant fossil fuel-fired technology in the future, U.S. EPA anticipated that “the proposed EGU GHG NSPS would result in negligible CO2 emission changes, energy impacts, quantified benefits, costs, and economic impacts by 2020…and did not anticipate this rule would have any impacts on the price of electricity, employment or labor markets, or the U.S. economy.”  In drafting the rule, U.S. EPA evaluated a wide range of electricity market conditions and performed multiple sensitivity analyses, which caused them to believe that industry would choose to construct new units that already met these standards, regardless of the proposed rule.

U.S. EPA claimed the first proposed CO2 standard was “practical, flexible, and achievable” which imparted a feeling to many that the first proposed CO2 standard was relatively achievable, with new fossil fuel-fired EGU sources greater than 25 megawatt electric (MWe) being required to meet an output-based standard of 1,000 pounds of CO2 per megawatt-hour (lb CO2/MWh), but also being offered alternative compliance options like output-based standards to be averaged over a lengthy 30-year period.   The proposed rule served as a model from which we could all speculate what future GHG rules might look like, resolving some of the longstanding mystery that surrounded this category of emissions.  However, U.S. EPA failed to issue the final CO2 NSPS for new EGUs within one (1) year of its original groundbreaking proposal.  Since U.S. EPA failed to issue the final NSPS for new EGUs within one (1) year of the original proposed version, the rule was required to be “terminated” and U.S. EPA was required to re-propose, accept comments on, and finalize a new version of the rule.    President Obama released his Climate Action Plan (Plan) and Presidential Memorandum on June 25, 2013.  In the memorandum, Obama formally directed U.S. EPA to re-propose NSPS for emissions of CO2 for new EGUs by September 20, 2013 and directed U.S. EPA to propose a CO2 NSPS for existing EGUs by June 2014.

In response to Obama’s June 2013 directive, U.S. EPA withdrew the March 27, 2012 proposal and released its second proposed NSPS for emissions of CO2 from new power plants on September 20, 2013.  While the signed proposal met the Court ordered deadline for action by U.S. EPA, the rule was not officially proposed until publication in the Federal Register on January 8, 2014.  In this second proposal, separate standards of performance were proposed for different types of new EGU configurations instead of the single standard proposed on March 27, 2012.  Specifically, separate standards of performance would apply to newly constructed affected fossil fuel-fired electric utility steam generating units (utility boilers and integrated gasification combined cycle (IGCC) units) and newly constructed natural gas-fired stationary combustion turbines.  The September 20, 2013 rule proposes separate standards of performance for fossil fuel-fired electric utility steam generating units and integrated gasification combined cycle units that burn coal, petroleum coke, and other fossil fuels based on partial implementation of carbon capture and sequestration (CCS) technology as the Best System of Emission Reduction (BSER) adequately demonstrated for those sources, despite criticism that CCS is cost prohibitive and will yet require years of development before it is ready for commercial deployment.  The action also proposes standards for natural gas-fired stationary combustion turbines based on combined cycle technology as the BSER.  If the rule is finalized as proposed, new large natural gas-fired turbines would need to meet an output-based standard of 1,000 pounds of CO2 per megawatt-hour, while new small natural gas-fired turbines would need to meet an output-based standard of 1,100 pounds of CO2 per megawatt-hour.  New coal-fired units would need to meet an output-based standard of 1,100 pounds of CO2 per megawatt-hour, and would have the option to meet a more stringent limit if they chose to average emissions over multiple years.  Under U.S. EPA’s definition of affected units, most simple cycle “peaking” stationary combustion turbines, which typically sell significantly less than one-third of their potential electric output to the grid, would not be affected by the latest proposal.

Although the deadline to submit public comments was November 29, 2013, the September 2013 proposed rule for new EGUs continues to receive its fair share of criticism amongst industry, political groups, and environmentalists alike.  One argument at play is that a bifurcated approach of assigning standards to separate types emissions sources could limit U.S. EPA’s ability to ever allow cross-category trading for existing sources.   For this reason, we may see U.S. EPA return to its original approach of issuing a single standard in the finalized version of the rule.  Utilities have commented that the rule is “fatally flawed” in that it does not satisfy a Clean Air Act (CAA) mandate that the rule must ensure emissions will be reduced – the rule mandates carbon capture but it does not actually guarantee cuts in GHGs generated at facilities.  Grid reliability is another concern.  Non-utility industry groups fear that U.S. EPA’s proposal to require novel CCS technology sets a negative precedent that, if upheld following an expected legal challenge, would allow U.S. EPA to impose similar “stretch” technologies on other industry sectors.  The oil and gas sector has even been vocal in pointing out that the CCS provisions of the proposed rule have created hurdles for well operators to accept CO2 streams from coal-fired power plants, making it less advantageous than using CO2 from other sources, which could present compliance issues for new power plants with fewer options for compliance.

A major argument concerning the CCS requirement of the proposed rule has been that the Bush-era Energy Policy Act of 2005 (EPAct) undermines key parts of the proposed rule in requiring new coal-fired power plants to install CCS technology.  The EPAct specifically prohibits U.S. EPA from citing a technology as being “adequately demonstrated” if the technology has only been used at a facility receiving assistance under the Department of Energy’s Clean Coal Power Initiative (CCPI), or at a facility that is receiving an advanced coal project tax credit.  The power plants with CCS that are cited in the proposed NSPS as the justification for CCS being ‘adequately demonstrated’ all received such assistance.  Therefore, one of the beliefs of the opponents of the proposed new rule is that U.S. EPA has proposed standards which are beyond its authority.  To further complicate the discussion around the CCS requirement, U.S. EPA’s Science Advisory Board (SAB) has voted unanimously not to review the new rule, on the grounds that the CCS requirement falls outside the rule’s scope and that many of the scientific concerns regarding CCS may be policy and legal matters, instead of an element of the proposed rule that would be under the jurisdiction of SAB review.  U.S. EPA has formally refuted the claims relating to the EPAct, saying that its basis for requiring CCS was not based “solely” on the few coal utility projects affected by constraints in this energy law.

U.S. EPA has not recently commented on when it intends to finalize the proposed rule for new EGUs, but some believe U.S. EPA is planning to intentionally delay finalizing it until after completion of the 2014 elections.  If history repeats itself, and U.S. EPA has not finalized the proposed rule by January 8, 2015, we will likely see U.S. EPA be required to withdrawal the second proposed rule for not finalizing it within one (1) year of its proposal, and U.S. EPA would be required to re-propose, accept comments on, and finalize yet another new version of this rule.

Proposed Standards for Existing, Modified, and Reconstructed Sources

Provisions for modified and existing EGUs were not proposed until very recently, in June 2014.

U.S. EPA proposed a “Clean Power Plan” on June 2, 2014 which consists of the following two (2) proposed regulations as well as the proposed January 8, 2014 NSPS for fossil fuel-fired EGUs:

1. Carbon Pollution Emission Guidelines for Existing Stationary Sources: Electric Utility Generating Units
2. Carbon Pollution Standards for Modified and Reconstructed Stationary Sources: Electric Utility Generating Units

Each of the proposed new regulations was published in the Federal Register on June 18, 2014.

So you have an existing EGU right now – how are you affected?  Short answer is you won’t be affected immediately.  Under the proposed Carbon Pollution Emission Guidelines for Existing Stationary Sources, U.S. EPA has proposed emission guidelines for states to follow in developing plans to address GHG from existing fossil fuel-fired electric generating units.  In the proposal, U.S. EPA has proposed state-specific rate-based goals for CO2 emissions from the power sector, as well as guidelines for states to follow in developing plans to achieve the state-specific goals, so that by 2030 a nationwide 30% CO2 emission decrease is achieved from the power sector over 2005 baseline levels.  To achieve this reduction, the proposal lays out state-specific CO2 goals that each state is required to meet, but it does not prescribe how a state should meet its goal.  The proposed rule includes guidelines and recommendations for the development and implementation of state plans, and proposes that BSER for existing sources be based upon existing strategies currently being met by states and companies already to reduce CO2 emissions from EGUs.

U.S. EPA has proposed the following four (4) building blocks of BSER:

1. Building Block 1: Reductions achievable through improvements in individual EGUs’ emission rates.
2. Building Block 2: EGU CO2 emissions reductions achievable through re-dispatch from affected steam EGUs to affected NGCC units.
3. Building Block 3: EGU CO2 emissions reductions achievable by meeting demand for electricity or electricity services through expanded use of low- or zero-carbon generating capacity.
4. Building Block 4: Expanded use of demand-side energy efficiency.

The propose rule also cites the following as examples of strategies states could implement in order to meet their state-specific targets: market-based emission limits, GHG performance standards, utility planning approaches, renewable portfolio standards, demand-site energy efficiency programs, and energy efficiency resource standards.

Early opposition to the proposed standards request that the rule’s GHG reduction targets to be recalculated to include a “safety valve” that could allow utilities to operate out of compliance if necessary for grid reliability.  Given the extreme flexibility that would be given to states to decide how they modify their plans to enforce the rule, we can also expect to see numerous challenges between the power industry and the states.

What if you have an existing EGU right now that you plan to either modify or reconstruct in the future – how would you be affected under that scenario?  Under the proposed Carbon Pollution Standards for Modified and Reconstructed Stationary Sources, U.S. EPA has proposed standards that would limit emissions of CO2 from modified or reconstructed fossil fuel-fired electric utility steam generating units and natural gas-fired stationary combustion turbines.

This table summarizes U.S. EPA’s proposed BSER and Standards for:

1. Modified fossil fuel-fired utility boilers and IGCC units whose non-GHG emissions are regulated under 40 CFR Part 60, Subpart Da.
2. Modified natural gas-fired stationary combustion turbines whose non-GHG emissions are regulated under 40 CFR Part 60, Subpart KKKK.
3. Reconstructed fossil fuel-fired utility boilers and IGCC units whose non-GHG emissions are regulated under 40 CFR Part 60, Subpart Da.
4. Reconstructed natural gas-fired stationary combustion turbines whose non-GHG emissions are regulated under 40 CFR Part 60, Subpart KKKK.

Under the proposed rule, a “modification” means a physical or operational change that increases the source’s maximum achievable hourly rate of emissions, and “reconstruction” means the replacement of components of an existing facility to an extent that (1) the fixed capital cost of the new components exceeds 50 percent of the fixed capital cost that would be required to construct a comparable entirely new facility, and (2) it is technologically and economically feasible to meet the applicable standards.

U.S. EPA is accepting comments on the June 18, 2014 proposals until October 16, 2014 and will hold four (4) public hearings on the proposed Clean Power Plan during the week of July 28 in the following cities: Denver, Atlanta, Washington, DC and Pittsburgh. Based on this input, U.S. EPA has announced its intent to finalize the June 18, 2014 standards for existing, modified, and reconstructed sources next June, which follows the schedule laid out in Obama’s June 2013 Climate Action Plan.  We will continue to keep you updated on activity concerning these proposed rules.  For more information on the proposed regulation of GHG in the utility industry please contact Megan Uhler at muhler@all4inc.com or 610.933.5246 x132.